How to Calculate Proration
Proration splits an annual cost — property tax, insurance, HOA dues or prepaid rent — between the seller and buyer for the part of the year each one is responsible for. Property-tax proration is the form tested most.
Formula
Daily rate = Annual amount ÷ days in the year (365, or 360 for a banker's year) A party's share = Daily rate × the number of days that party is responsible for
Worked example
Annual property tax = $3,650, paid in arrears (buyer will pay the full year).
• Daily rate = 3,650 ÷ 365 = $10.00 per day
• The seller owned the first 90 days of the year up to closing
• Seller owes the buyer = 90 × 10 = $900 (a credit to the buyer at closing)
Check: 3650/365=10; 90×10=900. ✓
360-day variation: a $3,600 tax ÷ 360 = $10/day, or ÷ 12 = $300/month.
Key points
- Decide who owes whom: paid in arrears → the seller credits the buyer for days already owned; paid in advance → the buyer credits the seller for days past closing.
- Use the day count the problem states (365 vs 360) — never mix them.
- Count the closing day per the problem's convention (often the seller owns the day of closing).
Common mistakes
- Using 365 when the problem specifies a 360-day year (or vice versa).
- Getting the direction of the credit backwards (arrears vs advance).
- An off-by-one error on the number of days.
When you use it
Almost every closing-statement problem involves proration; property-tax proration is the classic exam question.